Page 1 GAO-03-848R CFS Posthearing Questions 

United States General Accounting Office

Washington, DC 20548 

Comptroller General

of the United States

June 16, 2003 

The Honorable Todd R. Platts 

Chairman 

Subcommittee on Government Efficiency 

 and Financial Management 

Committee on Government Reform 

House of Representatives 

Subject: Responses to Posthearing Questions Related to GAO’s Testimony on the 

U.S. Government’s Consolidated Financial Statements for Fiscal Year 

2002 

Dear Mr. Chairman: 

On April 8, 2003, I testified before your subcommittee at a hearing on our report on 

the U.S. government’s consolidated financial statements for fiscal year 2002.1 This 

letter responds to questions related to our testimony from you and the Ranking 

Minority Member and to subsequent questions from the Vice Chairman that you 

asked us to answer for the record. The questions and my responses follow. 

Question from Chairman Platts

1. What is the status of the financial management systems modernization 

effort, agency by agency? 

At a meeting with subcommittee counsel and staff on April 16, we agreed on an 

approach based primarily on available data sources and an end-of-June time frame 

for separately providing this information. We will compile a list of the 24 Chief 

Financial Officers (CFO) Act agencies’ core financial systems along with key data 

related to each system, such as whether it is a commercial off-the-shelf system. We 

will identify the status of agencies’ plans to acquire new core financial systems and 

whether any mixed financial systems at the agencies are slated to be updated. 

 

1

U.S. General Accounting Office, Fiscal Year 2002 U.S. Government Financial Statements: 

Sustained Leadership and Oversight Needed for Effective Implementation of Financial Management 

Reform, GAO-03-572T (Washington, D.C.: Apr. 8, 2003). The fiscal year 2002 Financial Report of the 

United States Government, issued by the Department of the Treasury on March 31, 2003, is available 

through GAO’s Web site at www.gao.gov and Treasury’s Web site at www.fms.treas.gov/fr/index.html. 
Page 2 GAO-03-848R CFS Posthearing Questions

Question from Ranking Minority Member Towns

1. The Department of Energy for a number of years had problems estimating 

its environmental liabilities, which it has since corrected. How did 

Energy manage to correct its problem, and can these solutions be used at 

the Department of Defense? 

The Department of Energy (DOE) is responsible for management and cleanup of 

environmental contamination related to the process of producing nuclear weapons. 

For fiscal year 1998, the DOE Inspector General’s (IG) financial audit opinion stated 

that auditors were unable to satisfy themselves that DOE’s recorded environmental 

liability of $186 billion was fairly stated because of the following deficiencies: 

• DOE lacked adequate documentation to support some cost estimates and costestimating methodologies. 

• Valid environmental liabilities were not included in the estimate. 

• Cost estimates had not been updated through the end of the fiscal year under 

audit. 

• Established cost-estimating guidelines were not consistently applied. 

For fiscal year 1999, the DOE IG was able to conclude that DOE’s reported $231 

billion environmental liability was fairly stated. According to the DOE IG, DOE’s 

Office of Environmental Management completed corrective actions during fiscal year 

1999 that included strengthening internal controls over developing the estimate; 

assessing individual cost estimates that make up the environmental liability in terms 

of scope, cost, and schedule; and quantifying the uncertainty of the estimates caused 

by technical problems and funding shortfalls. To ensure the reliability of future 

environmental liability estimates and to guide cleanup efforts, DOE developed a 

program, which it documented in the June 1998 publication Accelerated Cleanup:

Paths to Closure, based on site-developed, project-by-project forecasts of the scope, 

schedule, and costs to complete DOE’s approximately 350 projects. The objective 

was to manage the cleanup of 90 percent of contaminated sites by 2006. This 

program, which had the support of top management, was key to DOE’s success. 

The Department of Defense (DOD) is responsible for management and cleanup of 

very diverse types of environmental contamination, including 

• closed and open sites where past and current waste disposal practices, leaks, 

spills, and other activities have created a risk to public health or the environment; 

• closed, transferring, and active military ranges where contamination and 

unexploded ordnance create environmental hazards; and 

• cleanup, demilitarization, and disposal of nuclear and non-nuclear weapons 

systems, chemical weapons, and munitions. 

Although the types of cleanup are different, the obstacles to reliable cost estimation 

are similar to those faced by DOE in fiscal year 1998. For the past few years, the 

DOD IG has reported that the environmental liability figure reported in DOD’s 

financial statements is not auditable because of problems related to insufficient 
Page 3 GAO-03-848R CFS Posthearing Questions

guidance, lack of audit trails, use of inconsistent or unvalidated cost-estimating 

models, and incomplete inventories of sites. We have also cited deficiencies in DOD’s 

reported environmental liabilities as a disclaimer issue in the governmentwide audit 

reports since fiscal year 1997, and we have issued reports on several kinds of 

environmental cleanup issues, including training ranges and ongoing operations.2 

In its fiscal year 2002 performance and accountability report, DOD management 

included a discussion of progress being made to address material weaknesses, 

including environmental liabilities. According to the report, DOD 

• has issued improved guidance—for all areas except ongoing operations—that will 

help its components compile complete, accurate, and fully substantiated 

environmental liability data; 

• is developing and maintaining adequate supporting documentation and audit trails 

for cost-to-complete estimates for the environmental restoration of more than 

30,000 closed contaminated sites on open installations, closed installations, and 

Base Realignment and Closure sites; 

• has validated the cost-estimating models used in the calculation and 

documentation of environmental liability costs; 

• has developed a sound methodology for estimating liabilities associated with 

nuclear-powered ships and submarines; and 

• has completed inventories of all but training ranges and sites with ongoing 

operations that result in contamination. 

DOD has also reviewed Paths to Closure and believes that DOE’s approach is similar 

to that used by DOD to estimate and report for the Defense Environmental 

Restoration Program (DERP). DOD reports site-by-site information in its DERP 

report to Congress each year and estimates cleanup costs for those sites out to the 

year 2030. DOD has stated that it has also begun reconciling the DERP reported 

costs to the financial statement reported costs. Finally, DOD has designated the 

Deputy Under Secretary of Defense (Installations and Environment) as the focal 

point for all environmental restoration and cleanup issues except for chemical 

demilitarization, which is the responsibility of the Under Secretary of Defense 

(Acquisition, Technology and Logistics). 

DOD claims that various components of its environmental cleanup and disposal costs 

are now auditable. For fiscal year 2003, the DOD IG plans to review the Navy’s 

methodology for estimating liabilities associated with nuclear-powered ships and 

submarines and also to audit the Army’s chemical demilitarization cost estimates. 

 

2

U.S. General Accounting Office, Environmental Liabilities: DOD Training Range Cost Estimates 

Are Likely Understated, GAO-01-479 (Washington, D.C.: Apr. 11, 2001), and Environmental 

Liabilities: Cleanup Costs from Certain DOD Operations Are Not Being Reported, GAO-02-117 

(Washington, D.C.: Dec. 14, 2001). 
Page 4 GAO-03-848R CFS Posthearing Questions

Questions from Vice Chairman Blackburn Submitted on April 24

1. What are your recommendations to arrest spending on Medicare/Medicaid 

and Social Security? 

As I have testified on numerous occasions before various committees, reducing the 

relative future burdens of Social Security and health programs is critical to promoting 

a sustainable budget policy for the longer term.3 While much of the public debate 

concerning the Social Security and Medicare programs focuses on trust fund 

balances—that is, on the programs’ solvency—the larger issue concerns program 

sustainability. Absent reform, the impact of federal health and retirement programs 

on budget choices will be felt long before projected trust fund insolvency dates when 

the cash needs of these programs begin to seriously constrain overall budgetary 

flexibility. 

Early action to change these programs would yield the highest fiscal dividends for the 

federal budget and would provide a longer period for prospective beneficiaries to 

make adjustments in their own planning. Waiting to build economic resources and 

reform future claims entails risks. First, we lose an important window where today’s 

relatively large workforce can increase saving and enhance productivity, two 

elements critical to growing the future economy. Second, we lose the opportunity to 

reduce the burden of interest payments, thereby creating a legacy of higher debt as 

well as elderly entitlement spending for the relatively smaller workforce of the future. 

Finally, and most critically, we risk losing the opportunity to phase in changes 

gradually so that all can make the adjustments needed in private and public plans to 

accommodate this historic shift. 

Unfortunately, the long-range challenge has become more difficult, and the window 

of opportunity to address the entitlement challenge is narrowing. In fact, the leading 

edge of the baby boom generation will become eligible for Social Security in only 5 

years. As baby boomers retire and the numbers of those entitled to these retirement 

benefits grow, the difficulties of reform will be compounded. Accordingly, it remains 

more important than ever to deal with these issues over the next several years. 

Many proposals to control spending, increase revenues, and restructure Social 

Security and Medicare have been put forth by various commissions, members of 

Congress, and independent “think tanks.” Although we do not make specific policy 

recommendations, to assist Congress in its deliberations, we have developed criteria 

for evaluating Social Security reform proposals and soon will issue criteria for 

evaluating health care reforms. Our criteria for evaluating Social Security reform 

proposals aim to balance financial and economic considerations with benefit 

adequacy and equity issues and the administrative challenges associated with various 

 

3

See, for example, U.S. General Accounting Office, Medicare: Financial Challenges and 

Considerations for Reform, GAO-03-577T (Washington, D.C.: Apr. 10, 2003); Medicare: Observations 

on Program Sustainability and Strategies to Control Spending on Any Proposed Drug Benefit, GAO03-650T (Washington, D.C.: April 9, 2003); Social Security: Analysis of Issues and Selected Reform 

Proposals, GAO-03-376T (Washington, D.C.: Jan. 15, 2003); Budget Issues: Long-Term Fiscal 

Challenges, GAO-02-467T (Washington, D.C.: Feb. 27, 2002). 
Page 5 GAO-03-848R CFS Posthearing Questions

proposals. The use of these criteria can help facilitate fair consideration and informed 

debate of reform proposals. The weight that different policymakers may place on 

different criteria will vary, depending on how they value different attributes. 

The proposals we have examined, both in 2002 and earlier, reflect the likelihood that 

the structural changes required to restore Social Security’s long-term viability 

generally may require some combination of reductions from currently scheduled 

benefits and revenue increases, and may include the use of some general revenues.4

 

Proposals employ possible benefit reductions within the current program structure, 

including modifying the benefit formula, raising the retirement age, and reducing 

cost-of-living adjustments. Revenue increases might take the form of increases in the 

payroll tax rate and/or wage base, expanding coverage to include the relatively few 

workers who are still not covered under Social Security, or allowing the trust funds to 

be invested in potentially higher-yielding securities, such as stocks. Similarly, some 

proposals rely on general revenue transfers to increase the amount of money going 

toward the Social Security program. Some proposals include individual accounts that 

would also involve Social Security benefit reductions and/or revenue increases. 

Medicare also faces a long-range, fundamental, and more serious financing problem 

driven by known demographic trends and projected escalation of health care 

spending beyond general inflation. As with Social Security, Medicare reform would 

be done best with considerable lead time to phase in changes and before the changes 

that are needed become dramatic and disruptive. Given the size of Medicare’s 

financial challenge, it is only realistic to expect that reforms intended to bring down 

future costs will have to proceed incrementally. We should begin this now, when 

retirees are still a far smaller proportion of the population than they will be in the 

future. The sooner we get started, the less difficult the task will be. 

We should also remember that the sources of some of Medicare’s problems—and its 

solutions—are outside the program and are universal to all health care payers. Some 

tax preferences mask the full cost of providing health benefits and can work at crosspurposes to the goal of moderating health care spending. Therefore, it may be 

important to reexamine the incentives contained in current tax policy and consider 

potential reforms. Advances in medical technology are also likely to keep raising the 

price tag of providing care, regardless of the payer. Although technological advances 

unquestionably provide medical benefits, judging the value of those benefits—and 

weighing them against the additional costs—is more difficult. Consumers are not as 

informed about the cost of health care and its quality as they may be about other 

goods and services. Thus, while the greater use of market forces may help to control 

cost growth, it will undoubtedly be necessary to employ additional transparency and 

cost control methods as well. Ultimately, we will need to look at broader health care 

reforms to balance health care spending with other societal priorities. In doing this, 

it is important to note the fundamental differences between health care wants, which 

 

4

See, for example, U.S. General Accounting Office, Social Security Reform: Analysis of Reform 

Models Developed by the President’s Commission to Strengthen Social Security, GAO-03-310

(Washington, D.C.: Jan. 15, 2003), and Social Security: Evaluating Reform Proposals, 

GAO/AIMD/HEHS-00-29 (Washington, D.C., Nov. 4, 1999). 
Page 6 GAO-03-848R CFS Posthearing Questions

are virtually unlimited; needs, which should be defined and addressed; and overall 

affordability and sustainability, of which there is a limit. 

We are preparing a health care framework that includes a set of principles to help 

policy makers in their efforts to assess various health financing reform options. This 

framework will examine health care issues systemwide and identify the 

interconnections between public programs that finance health care and the private 

insurance market. The framework can serve as a tool for defining policy goals and 

ensuring the use of consistent criteria for evaluating changes. By facilitating debate, 

the framework can encourage acceptance of changes necessary to put us on a path to 

fiscal sustainability. 

For Medicare and Medicaid, the sustainability challenge has three levels—the level of 

the individual programs, the health care system in which they are embedded, and our 

long-term federal fiscal challenge. GAO’s long-term budget simulations continue to 

show that to move into the future with no changes to federal health and retirement 

programs is to envision a very different role for the federal government. Assuming, 

for example, that the tax reductions enacted in 2001 do not sunset and discretionary 

spending keeps pace with the economy, by midcentury federal revenues may not 

even be adequate to pay Social Security and interest on the federal debt. To obtain 

budget balance, massive spending cuts, tax increases, or some combination of the 

two would be necessary. Neither slowing the growth of discretionary spending nor 

allowing the tax reductions to sunset eliminates the imbalance. In addition, while 

economic growth would help ease our burden, the projected fiscal gap is too great for 

us to grow our way out of the problem. 

2. What is your recommended course of action to address the true cost of 

new legislation (for example, veterans’ benefits, prescription drug 

plans)?

Current budget reporting is not always designed to promote the recognition and 

explicit consideration of the costs of some policies and programs. For example, the 

government undertakes a wide range of responsibilities, policies, programs, and 

activities that may obligate it to future spending or simply create an expectation for 

such spending. These “fiscal exposures” range from explicit liabilities to implicit 

promises embedded in current policy or public expectations. The examples you cite 

of new legislation for veterans’ benefits or prescription drug plans could be viewed as 

creating new fiscal exposures. We have made the following recommendations5 to 

increase the visibility and transparency of such exposures: 

• First, we recommend that OMB report the future estimated costs associated with 

certain exposures as a new budget concept—“exposure level”—as a notational 

item in the Program and Financing schedule of the President’s budget. As 

opposed to cash, the “exposure level” might be reported in present value terms. 

 

5

U.S. General Accounting Office, Fiscal Exposures: Improving the Budgetary Focus on Long-Term 

Costs and Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003). 
Page 7 GAO-03-848R CFS Posthearing Questions

Specifying the estimated potential future costs associated with current decisions 

would promote transparency. 

• We also recommend that OMB report annually on fiscal exposures, including a 

concise list and description of such exposures, cost estimates where possible, and 

an assessment of methodologies and data used to produce the cost estimates. 

Explicitly and directly integrating this report with long-range projections and 

analysis of the budget as a whole would increase its usefulness for assessing the 

potential implications for long-range fiscal sustainability and flexibility. 

Legislation proposed by the President could be included if the report were issued 

as part of the President’s budget and thus could help inform and provide longterm context to budget deliberations. 

Other entities also can promote transparency and visibility of fiscal exposures by 

various actions: 

• FASAB. Continue to make progress on the accounting and reporting front (e.g., 

trust funds and social insurance). 

• Treasury. Enhance disclosures in the annual governmentwide performance and 

accountability report. 

• GAO. Continue to emphasize the issue in existing reports and testimonies. 

Comment on any annual fiscal exposures report published by OMB. 

• Congress. Consider requiring that discounted present value numbers be 

considered for major revenue- and spending-related legislative proposals before 

legislation is enacted. 

In addition, we have stated that Congress may wish to consider exploring options for 

improving the information available on and the attention given to fiscal exposures.6

 

To increase congressional attention to such exposures, Congress could develop 

budget process mechanisms that prompt more deliberation about fiscal exposures. 

One type of mechanism that could be used is a point of order. Congress could modify 

budget rules to provide for a point of order against any proposed legislation that 

creates new exposures or increases the estimated costs of existing exposures over 

some specified level. Or, revised rules could provide for a point of order against any 

proposed legislation that does not include estimates of the potential costs of fiscal 

exposures created by the legislation. A second type of budget process mechanism 

that would prompt deliberation of fiscal exposures would be to establish triggers that 

require some action when the estimated future costs of a given exposure rise above 

some specified threshold. 

3. How are audit results being used to affect budgeting processes for the 

current and next year, and how should they be used? 

Ultimately, the objective is for agencies to generate high-quality data and measure 

performance in a meaningful way to help inform decision makers during the budget 

 

6

GAO-03-213. 
Page 8 GAO-03-848R CFS Posthearing Questions

process when allocating resources and determining the most efficient and effective 

means of achieving policy objectives. Financial audit results are the beginning point 

in this process and should be considered along with the results of programmatic 

audits and performance reviews. 

Financial statements are included in the annual performance and accountability 

reports for the 24 CFO Act agencies. These financial statements, along with the 

accompanying management analysis and performance reports, can provide a wealth 

of information regarding agency performance and financial condition that can be 

considered as budgeting decisions are made. One of the objectives of federal 

financial management reform legislation is to improve the quality and availability of 

information for decision makers. The results of agency financial statement audits, 

including the related identification of any internal control weaknesses, 

noncompliance, and systems issues, provide the starting point for considering an 

agency’s ability to generate the information necessary to make informed decisions 

about its efficiency and effectiveness in achieving its mission and goals. For fiscal 

year 2002, while 21 of the 24 CFO Act agencies received an unqualified opinion on 

their financial statements, auditors for 19 of the 24 agencies reported that the 

agencies’ systems did not comply substantially with at least one of the three 

requirements of the Federal Financial Management Improvement Act. This lack of 

compliance raises questions about the ability of these agencies to generate timely, 

useful, and reliable information needed for day-to-day management and 

congressional oversight. 

The audited financial statements also provide indications of the quality of certain 

data included in budget requests and historical information that could be considered 

during budget deliberations. For example, the Statement of Budgetary Resources in 

the agency’s audited financial statements provides information as to the status and 

uses of budgetary resources, such as amounts remaining available for obligation as of 

the end of the fiscal year. Because this information is audited, it provides assurance 

as to the reliability of these amounts in relation to the financial statements as a 

whole. In areas such as direct loans and loan guarantees, the accounting used for the 

financial statements under generally accepted accounting principles closely mirrors 

the Credit Reform Act requirements used for the budget. This means that errors, 

weaknesses in the estimation process, or other issues identified during the financial 

statement audit may also be present in related budget requests. 

In addition, the audited financial statements provide information not presented in the 

budget that could also be considered in the budgeting process. For example, 

liabilities for the total estimated cost of environmental cleanup and other liabilities, 

such as those for federal employees’ and veterans’ benefits, are presented in the 

financial statements. These amounts should include the entire estimated liability for 

these programs, rather than the projected cash flows for limited periods included in 

the budget. Further, the statements present information on social insurance 

programs, such as Social Security and Medicare, that shows the long-term fiscal 

challenges associated with these programs that could also be considered in the 

budget process. While much of this information is included in individual agency 

financial statements, the presentation of this information in the consolidated financial 
Page 9 GAO-03-848R CFS Posthearing Questions

report of the U.S. government can provide a basis for analyzing the overall long-range 

fiscal challenges faced by our government as a whole, during the deliberative process 

on the budget. 

The audited financial statements present data as of a single point in time or for a 

specific period. Even if an agency’s financial statements received an unqualified 

opinion, there are no direct assurances about other data from the agency, such as 

quarterly results or performance information. However, as part of the audits, 

material weaknesses in internal control and inadequate financial systems are often 

identified. These deficiencies can affect an agency’s ability to generate reliable cost 

information and measure the performance of its programs. The impact of these 

conditions on the reliability of other, unaudited agency data should be considered 

from an oversight or budget perspective. 

I am providing copies of this letter to the Ranking Minority Member and Vice 

Chairman of your subcommittee. This letter is also available on GAO’s Web site at 

www.gao.gov. 

If you or your staff have questions about the responses to your questions, please 

contact me at (202) 512-5500 or Gary T. Engel, Director, at (202) 512-3406 or 

engelg@gao.gov. 

Sincerely yours, 

David M. Walker 

Comptroller General 

of the United States 

(198195)